Cheese prices may increase as the effects of drought take effect. Photo / Dean Purcell

Got the fondue set out yet? There's never been a better time to go cheese crazy, it seems.

A combination of global commodity trends and some intense retail competition has seen the prices plummet as low as $6.99 a kilogram for the yellow rubbery stuff Kiwis like to think of as "normal" cheese.

But better get grilling, commodity prices tend to have a delay of about six months to nine months on them before they flow through to the tag on supermarket shelves.

On that basis we can expect to see the price rise steadily again over the coming months. The commodity price of dairy has been tracking up since it hit a worrying low last winter.

The drought - that this weekend's rain probably hasn't resolved - could yet push dairy prices back to the kind of records that had consumers up-in-arms back in 2008 and again early 2011. Perhaps when it happens this time we could try to remember that higher dairy prices provide a welcome cushion for an economy which is still relying on agricultural commodities to hold the fort despite the best efforts of tech, manufacturing and tourism.

We won't of course, we'll get upset. Dairy has a special place in New Zealand culture and becomes the focal point of protest over high food prices during commodity spikes.

It is a phenomenon that is seen around the world: in Indonesia it's chillies and in India onions.

Of all the commodities dairy is certainly the most crucial to New Zealand's economic well being. Unlike oil, orange juice or pork bellies it has never been a fixture of the Chicago Mercantile Exchange or any other major real time market. That meant for years we were looking back at very historic data for sense of where the price was going.

But since Fonterra launched its bi-weekly online auction in 2008 we've been getting a good regular snapshot of real time prices. In fact the world has been getting a good snapshot because Fonterra is the largest global exporter of dairy (bigger companies like Nestle and Danone have a large domestic focus) so where Fonterra's price goes, so follows the world price.

Likewise production levels on New Zealand dairy farms have a very direct impact on the global price.

That's why we saw the dairy price spike sharply in the last auction. Drought and the likely constriction of volumes coming out of New Zealand is being factored into the supply and demand equation.

It is still not great news for farmers. The extra few cents per kg of milk solids that might flow from a higher global price won't offset the big fall in volume and lower number of kilograms that they'll sell this year.

Nevertheless, the market fluctuation does provide a sort of hedge which offsets some of the weather risk. In a similar way our floating dollar provides a hedge for the nation's economy when commodity prices slump.

Everyone from the Green Party through to manufacturers, Bill English and the Reserve Bank seem to agree the dollar is too high right now.

When the dollar is low we earn more in for our produce in local currency terms and we are more competitive because our goods appear cheaper to international buyers. When it is too high exporters struggle to compete globally and earn less local currency - with which wages are paid.

The hedge is that if dairy prices plummet - as they did after the global financial crisis - the kiwi dollar tends to follow. Unfortunately for many non-commodity based exporters, global currency markets remain highly focused on New Zealand as a dairy economy. That means some of them have become less competitive are struggling with wages and cutting jobs. Our reliance on dairy is valuable but comes at a cost. The tougher things are for other exporters, the more we rely on agriculture, and the more the traders will stick to viewing us as an agricultural economy.

That's why it is vital for the Government to actively promote the tech and manufacturing sectors even while we acknowledge the ongoing value of the dairy industry.

The drought and the likelihood that it could knock up to $2 billion off GDP should provide a reality check for currency traders. That doesn't mean the kiwi will actually fall, it just means that we may get a clearer indication of how grounded in reality they are.

The flattening of a recovery curve is also being factored into the Reserve Bank's equations and could allow them to keep interest rates lower for longer. That too should put downward pressure on the NZ dollar.

If it doesn't, new Reserve Bank Governor Graeme Wheeler warned the markets this week, the official cash rate could be cut.

But really, the thing that will make the biggest difference to the local currency is the resurrection of the US dollar. That's something that is likely at some point in the next year or so as long as the US economy continues its slow recovery. Eventually the Federal Reserve will feel comfortable enough to start talking about normalising interest rates and an end to quantitative easing. Then the kiwi will fall in relative terms.

Probably, that is. There are no certainties in economics. But the prospect that cheese is cheaper now than it will be in six months is one of the safer bets out there. Enjoy it while it lasts.

Liam Dann is the Business editor of the New Zealand Herald, overseeing all our business content in print and online. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy.